IRS Revenue Ruling
2001-30

 Code Sec. 401

<<FULL TEXT>>

26 CFR 1.401(a)(4)-8: Cross-testing.

This revenue ruling describes specific conditions in order for defined
benefit replacement allocations under a defined contribution plan to meet
section 1.401(a)(4)-8(b) of the Income Tax Regulations.


REV. RUL. 2001-30

I. PURPOSE

This revenue ruling provides guidance with respect to the application
of section 1.401(a)(4)-8(b) of the Income Tax Regulations relating to
compliance of certain new comparability and similar defined contribution
plans with the nondiscrimination requirements of section 401(a)(4) of the
Internal Revenue Code.

Under those regulations, a qualified defined contribution plan that has
broadly available allocation rates can be tested for nondiscrimination
based on plan benefits (rather than contributions) whether or not it meets
the minimum allocation gateway. In determining whether a plan has broadly
available allocation rates, the regulations permit an allocation to be
disregarded to the extent that it is a defined benefit replacement
allocation or other transition allocation. Allocations are defined benefit
replacement allocations if they satisfy the basic conditions in the
regulations and the specific conditions prescribed in this revenue ruling.


II. BACKGROUND

Under final regulations (T.D. 8954, 2001-29 I.R.B. 47) amending section
1.401(a)(4)-8(b), published in the Federal Register on June 29, 2001, a
defined contribution plan must satisfy a minimum allocation gateway in
order to be eligible to meet the nondiscrimination requirements of section
401(a)(4) on the basis of plan benefits rather than contributions, unless,
for the plan year, the plan has broadly avail able allocation rates (as
defined in the regulations) or certain age-based allocations.

Section 1.401(a)(4)-8(b)(1)(iii)(A) provides that a plan has broadly
available allocation rates for a plan year if each allocation rate under
the plan is currently available during the plan year (within the meaning
of section 1.401(a)(4)-4(b)(2)) to a group of employees that satisfies
section 410(b) (without regard to the average benefit percentage test of
section 1.410(b)-5). In determining whether a plan has broadly available
allocation rates for the plan year, an employee's allocation may be
disregarded to the extent that it is a transition allocation. In order to
be treated as a transition allocation, the allocation must be either a
defined benefit replacement allocation (DBRA) described in section
1.401(a)(4)-8(b)(1)(iii)(D), or a pre-existing replacement allocation or
pre-existing merger and acquisition allocation described in section
1.401(a)(4)-8(b)(1)(iii)(E). Plan provisions relating to transition
allocations must meet the requirements of section
1.401(a)(4)-8(b)(1)(iii)(C).

Under section 1.401(a)(4)-8(b)(1)(iii)(D), in order for an allocation
to be a DBRA it must be provided in accordance with guidance prescribed by
the Commissioner in the Internal Revenue Bulletin (see "III. Specific
Conditions" below) and the basic conditions set forth in section
1.401(a)(4)-8(b)(1)(iii)(D)(1)-(4).


III. SPECIFIC CONDITIONS

(1) This revenue ruling sets forth the specific conditions that an
allocation must satisfy to be treated as a DBRA under section
1.401(a)(4)-8(b)(1)(iii)(D). These specific conditions are designed to
permit employers to provide, in a nondiscriminatory manner, allocations
replacing the retirement benefits that would have been provided under a
defined benefit plan, without having to satisfy the minimum allocation
gateway. At the same time, the specific conditions are designed to prevent
the inappropriate avoidance of the gateway in the case of plans that
provide special allocations for employees who formerly benefited under a
defined benefit plan.

(2) Pursuant to this revenue ruling, to be treated as a DBRA, an
allocation must meet the following conditions for a plan year:

(a) To satisfy the basic condition in section
1.401(a)(4)-8(b)(1)(iii)(D)(1) that the allocations are provided to a
group of employees who formerly benefitted under an established
nondiscriminatory defined benefit plan of the employer or of a prior
employer that provided age-based equivalent allocation rates, the
allocations must be based on a defined benefit plan that satisfies the
following specific conditions:

(i) The defined benefit plan's benefit formula applicable to the group
of employees generated equivalent normal allocation rates (determined
without regard to changes in accrual rates attributable to changes in an
employee's years of service) that increased from year to year as employees
attained higher ages.

(ii) The defined benefit plan satisfied sections 410(b) and 401(a)(4),
without regard to section 410(b)(6)(C) and without aggregating with any
other plan, for the plan year immediately preceding the first plan year
for which the allocation is provided to the employees. If the defined
benefit plan was sponsored by a prior employer, but not by the employer,
this condition does not apply.

(iii) The defined benefit plan was in effect for at least the 5-year
period ending on the date benefit accruals for the employees under the
defined benefit plan cease (with one year substituted for 5 years in the
case of a defined benefit plan of a former employer), and neither the plan
formula nor the coverage of the plan has been substantially changed during
such period.


(b) To satisfy the basic condition in section
1.401(a)(4)-8(b)(1)(iii)(D)(2) that the allocations for each employee in
the group were reasonably calculated, in a consistent manner, to replace
the retirement benefits that the employee would have been provided under a
defined benefit plan of the employer or of the prior employer, the
allocation must be reasonably calculated to replace the employee's
retirement benefits under the defined benefit plan based on the terms of
the defined benefit plan (including the section 415(b)(1)(A) limit) as in
effect immediately prior to the date benefit accruals under the defined
benefit plan ceased.

(c) To satisfy the basic condition in section
1.401(a)(4)-8(b)(1)(iii)(D)(4) that the composition of the group of
employees who receive the allocations for the plan year is
nondiscriminatory, the group of employees who receive the allocations must
satisfy section 410(b) (determined without regard to the average benefit
percentage test of section 1.410(b)-5) for the plan year.


DRAFTING INFORMATION

The principal authors of this revenue ruling are Kenneth R. Conn of the
Employee Plans, Tax Exempt and Government Entities Division and John T.
Ricotta and Linda S. F. Marshall of the Office of Division
Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). For
further information regarding this revenue ruling, please contact the
Employee Plans' taxpayer assistance telephone service between the hours of
1:30 and 3:30 p.m. Eastern time, Monday through Thursday, by calling (202)
283-9516. Mr. Conn's number is (202) 283-9526. Mr. Ricotta's number is
(202) 622-6060. Ms. Marshall's number is (202) 622-6090. (These telephone
numbers are not toll-free.)

<<END RULING>>

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